UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
(Mark One)
For the quarterly period ended
OR
For the transition period from to
Commission file number
Southern Missouri Bancorp, Inc. | ||
(Exact name of registrant as specified in its charter) | ||
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(State or jurisdiction of incorporation) | (IRS employer id. no.) | |
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(Address of principal executive offices) | (Zip code) |
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Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
☒ | No | ☐ |
Indicate by check mark whether the registrant has submitted electronically every Interactive Data file required to be submitted pursuant to Rule 405 of regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
☒ | No | ☐ |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):
Large accelerated filer | ☐ | ☒ | Non-accelerated filer | ☐ | Smaller reporting company | ||
Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12 b-2 of the Exchange Act)
Yes | No | ☒ |
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:
Class |
| Outstanding at November 6, 2023 |
Common Stock, Par Value $.01 |
SOUTHERN MISSOURI BANCORP, INC.
FORM 10-Q
INDEX
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | 38 | |||
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PART I: Item 1: Condensed Consolidated Financial Statements
SOUTHERN MISSOURI BANCORP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2023 AND JUNE 30, 2023
| September 30, 2023 |
| June 30, 2023 |
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(dollars in thousands) |
| (unaudited) | |||||
Assets | |||||||
Cash and cash equivalents | $ | | $ | | |||
Interest-bearing time deposits |
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Available for sale securities |
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Stock in FHLB of Des Moines |
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Stock in Federal Reserve Bank of St. Louis |
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Loans receivable, net of ACL of $ |
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Accrued interest receivable |
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Premises and equipment, net |
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Bank owned life insurance – cash surrender value |
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Goodwill |
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Other intangible assets, net |
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Prepaid expenses and other assets |
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Total assets | $ | | $ | | |||
Liabilities and Stockholders' Equity |
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Deposits | $ | | $ | | |||
Advances from FHLB |
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Accounts payable and other liabilities |
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Accrued interest payable |
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Subordinated debt |
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Total liabilities |
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Commitments and contingencies | |||||||
Common stock, $ |
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Additional paid-in capital |
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Retained earnings |
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Treasury stock of |
| ( |
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Accumulated other comprehensive loss |
| ( |
| ( | |||
Total stockholders' equity |
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Total liabilities and stockholders' equity | $ | | $ | |
See Notes to Condensed Consolidated Financial Statements
-3-
SOUTHERN MISSOURI BANCORP, INC
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2023 AND 2022 (Unaudited)
Three months ended |
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| September 30, | ||||||
(dollars in thousands except per share data) |
| 2023 |
| 2022 |
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Interest Income | |||||||
Loans | $ | | $ | | |||
Investment securities |
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Mortgage-backed securities |
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Other interest-earning assets |
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Total interest income |
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Interest Expense | |||||||
Deposits |
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Advances from FHLB |
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Subordinated debt |
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Total interest expense |
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Net Interest Income |
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Provision for Credit Losses |
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Net Interest Income After Provision for Credit Losses |
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Noninterest Income |
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Deposit account charges and related fees |
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Bank card interchange income |
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Loan late charges |
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Loan servicing fees |
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Other loan fees |
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Net realized gains on sale of loans |
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Earnings on bank owned life insurance |
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Other income |
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Total noninterest income |
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Noninterest Expense |
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Compensation and benefits |
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Occupancy and equipment, net |
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Data processing expense |
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Telecommunications expense |
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Deposit insurance premiums |
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Legal and professional fees |
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Advertising |
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Postage and office supplies |
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Intangibles amortization |
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Foreclosed property expenses/losses |
| ( |
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Other operating expense |
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Total noninterest expense |
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Income Before Income Taxes |
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Income Taxes |
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Net Income | $ | | $ | | |||
Basic earnings per share | $ | | $ | | |||
Diluted earnings per share | $ | | $ | | |||
Dividends paid | $ | | $ | |
See Notes to Condensed Consolidated Financial Statements
-4-
SOUTHERN MISSOURI BANCORP, INC
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2023 AND 2022 (Unaudited)
| Three months ended | ||||||
September 30, | |||||||
(dollars in thousands) | 2023 |
| 2022 |
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Net Income | $ | | $ | | |||
Other comprehensive loss: | |||||||
Unrealized losses on securities available-for-sale | ( | ( | |||||
Tax benefit | | | |||||
Total other comprehensive loss | ( | ( | |||||
Comprehensive Income | $ | | $ | |
See Notes to Condensed Consolidated Financial Statements
-5-
SOUTHERN MISSOURI BANCORP, INC
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2023 AND 2022 (Unaudited)
For the three-month period ended September 30, 2023 | ||||||||||||||||||
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| Additional |
| Accumulated Other | Total | |||||||||||||
| Common |
| Paid-In |
| Retained |
| Treasury |
| Comprehensive |
| Stockholders' | |||||||
(dollars in thousands) |
| Stock |
| Capital |
| Earnings |
| Stock |
| Loss |
| Equity | ||||||
BALANCE AS OF JUNE 30, 2023 | $ | | $ | | $ | | $ | ( | $ | ( | $ | | ||||||
Net Income | | | ||||||||||||||||
Change in unrealized loss on available for sale securities | ( | ( | ||||||||||||||||
Dividends paid on common stock ($ | ( | ( | ||||||||||||||||
Stock option expense | | | ||||||||||||||||
BALANCE AS OF SEPTEMBER 30, 2023 | $ | | $ | | $ | | $ | ( | $ | ( | $ | | ||||||
For the three-month period ended September 30, 2022 | ||||||||||||||||||
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| Additional |
| Accumulated Other | Total | |||||||||||||
| Common |
| Paid-In |
| Retained |
| Treasury |
| Comprehensive |
| Stockholders' | |||||||
(dollars in thousands) |
| Stock |
| Capital |
| Earnings |
| Stock |
| Loss |
| Equity | ||||||
BALANCE AS OF JUNE 30, 2022 | $ | | $ | | $ | | $ | ( | $ | ( | $ | | ||||||
Net Income | | | ||||||||||||||||
Change in unrealized loss on available for sale securities | ( | ( | ||||||||||||||||
Dividends paid on common stock ($ | ( | ( | ||||||||||||||||
Stock option expense | | | ||||||||||||||||
BALANCE AS OF SEPTEMBER 30, 2022 | $ | | $ | | $ | | $ | ( | $ | ( | $ | | ||||||
See Notes to Condensed Consolidated Financial Statements
-6-
SOUTHERN MISSOURI BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2023 AND 2022 (Unaudited)
Three months ended | |||||||
| September 30, | ||||||
(dollars in thousands) |
| 2023 |
| 2022 |
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Cash Flows From Operating Activities: | |||||||
Net Income | $ | | $ | | |||
Items not requiring (providing) cash: | |||||||
Depreciation |
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Loss on disposal of fixed assets |
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Stock option and stock grant expense |
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Loss (gain) on sale/write-down of REO |
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Amortization of intangible assets |
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Accretion of purchase accounting adjustments |
| ( |
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Increase in cash surrender value of bank owned life insurance (BOLI) |
| ( |
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Provision for credit losses |
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Net (accretion) amortization of premiums and discounts on securities |
| ( |
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Originations of loans held for sale |
| ( |
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Proceeds from sales of loans held for sale |
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Gain on sales of loans held for sale |
| ( |
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Changes in: |
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Accrued interest receivable |
| ( |
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Prepaid expenses and other assets |
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Accounts payable and other liabilities |
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Deferred income taxes |
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Accrued interest payable |
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Net cash provided by operating activities |
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Cash flows from investing activities: |
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Net increase in loans |
| ( |
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Net change in interest-bearing deposits |
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Proceeds from maturities of available for sale securities |
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Net redemptions (purchases) of Federal Home Loan Bank stock |
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Net redemptions (purchases) of Federal Reserve Bank of St. Louis stock |
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Purchases of available-for-sale securities |
| ( |
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Purchases of long-term investment | ( | | |||||
Purchases of premises and equipment |
| ( |
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Investments in state & federal tax credits |
| ( |
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Proceeds from sale of foreclosed assets |
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Net cash used in investing activities |
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Cash flows from financing activities: |
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Net (decrease) increase in demand deposits and savings accounts |
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Net increase in certificates of deposits |
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Proceeds from Federal Home Loan Bank advances |
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Repayments of Federal Home Loan Bank advances |
| ( |
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Dividends paid on common stock |
| ( |
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Net cash provided by financing activities |
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Increase (decrease) in cash and cash equivalents |
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Cash and cash equivalents at beginning of period |
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Cash and cash equivalents at end of period | $ | | $ | | |||
Supplemental disclosures of cash flow information: |
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Noncash investing and financing activities: |
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Conversion of loans to foreclosed real estate | $ | | $ | | |||
Conversion of loans to repossessed assets |
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Right of use assets obtained in exchange for lease obligations: Operating Leases |
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Cash paid during the period for: |
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Interest (net of interest credited) | $ | | $ | | |||
Income taxes |
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See Notes to Condensed Consolidated Financial Statements
-7-
SOUTHERN MISSOURI BANCORP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1: Basis of Presentation
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Securities and Exchange Commission (“SEC”) Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all material adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. The condensed consolidated balance sheet of the Company as of June 30, 2023, has been derived from the audited consolidated balance sheet of the Company as of that date. Operating results for the three-month period ended September 30, 2023, are not necessarily indicative of the results that may be expected for the entire fiscal year. For additional information, refer to the audited consolidated financial statements included in the Company’s June 30, 2023 Form 10-K, which was filed with the SEC.
The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Note 2: Organization and Summary of Significant Accounting Policies
Organization. Southern Missouri Bancorp, Inc., a Missouri corporation (the Company) was organized in 1994 and is the parent company of Southern Bank (the Bank). Substantially all of the Company’s consolidated revenues are derived from the operations of the Bank, and the Bank represents substantially all of the Company’s consolidated assets and liabilities. SB Real Estate Investments, LLC is a wholly-owned subsidiary of the Bank formed to hold Southern Bank Real Estate Investments, LLC. Southern Bank Real Estate Investments, LLC is a real estate investment trust (REIT) which is controlled by SB Real Estate Investments, LLC, and has other preferred shareholders in order to meet the requirements to be a REIT. At September 30, 2023, assets of the REIT were approximately $
The Bank is primarily engaged in providing a full range of banking and financial services to individuals and corporate customers in its market areas. The Bank and Company are subject to competition from other financial institutions. The Bank and Company are subject to the regulation of certain federal and state agencies and undergo periodic examinations by those regulatory authorities.
Basis of Financial Statement Presentation. The condensed consolidated financial statements of the Company have been prepared in conformity with accounting principles generally accepted in the United States of America and general practices within the banking industry. In the normal course of business, the Company encounters two significant types of risk: economic and regulatory. Economic risk is comprised of interest rate risk, credit risk, and market risk. The Company is subject to interest rate risk to the degree that its interest-bearing liabilities reprice on a different basis than its interest-earning assets. Credit risk is the risk of default on the Company’s investment or loan portfolios resulting from the borrowers’ inability or unwillingness to make contractually required payments. Market risk reflects changes in the value of the investment portfolio, collateral underlying loans receivable, and the value of the Company’s investments in real estate.
Principles of Consolidation. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
Use of Estimates. The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
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Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for credit losses, estimated fair values of purchased loans, and certain other assumptions and judgmental factors relating to investment securities.
Cash and Cash Equivalents. For purposes of reporting cash flows, cash and cash equivalents includes cash, due from depository institutions and interest-bearing deposits in other depository institutions with original maturities of three months or less. Interest-bearing deposits in other depository institutions were $
Interest-bearing Time Deposits. Interest bearing time deposits in banks mature within
Available for Sale Securities. Available for sale securities (“AFS”), which include any security for which the Company has no immediate plan to sell but which may be sold in the future, are carried at fair value. Unrealized gains and losses, net of tax, are reported in accumulated other comprehensive loss, a component of stockholders’ equity. All securities have been classified as available for sale.
Premiums and discounts on debt securities are amortized or accreted as adjustments to income over the estimated life of the security using the level yield method. Realized gains or losses on the sale of securities is based on the specific identification method. The fair value of securities is based on quoted market prices or dealer quotes. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.
The Company does not invest in collateralized mortgage obligations that are considered high risk.
For AFS securities with fair value less than amortized cost that management has no intent to sell and believes that it more likely than not will not be required to sell prior to recovery, only the credit loss component of the impairment is recognized in earnings, while the noncredit loss is recognized in accumulated other comprehensive income (loss). The credit loss component recognized in earnings is identified as the amount of principal cash flows not expected to be received over the remaining term of the security as projected based on cash flow projections, and is recorded to the Allowance for Credit Losses (“ACL”), by a charge to provision for credit losses. Accrued interest receivable is excluded from the estimate of credit losses. Both the ACL and the adjustment to net income may be reversed if conditions change. However, if the Company intends to sell an impaired AFS security, or, if it is more likely than not the Company will be required to sell such a security before recovering its amortized cost basis, the entire impairment amount would be recognized in earnings with a corresponding adjustment to the security’s amortized cost basis. Because the security’s amortized cost basis is adjusted to fair value, there is no ACL in this situation.
The Company evaluates impaired AFS securities at the individual level on a quarterly basis, and considers factors including, but not limited to: the extent to which the fair value of the security is less than the amortized cost basis; adverse conditions specifically related to the security, an industry, or geographic area; the payment structure of the security and likelihood of the issuer to be able to make payments that may increase in the future; failure of the issuer to make scheduled interest or principal payments; any changes to the rating of the security by a rating agency; and the ability and intent to hold the security until maturity. A qualitative determination as to whether any portion of the impairment is attributable to credit risk is acceptable. There were no credit related factors underlying unrealized losses on AFS securities at September 30, 2023, or June 30, 2023.
Changes in the ACL are recorded as expense. Losses are charged against the ACL when management believes the uncollectability of an AFS debt security is confirmed or when either of the criteria regarding intent or requirement to sell is met.
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Federal Reserve Bank and Federal Home Loan Bank Stock. The Bank is a member of the Federal Reserve and the Federal Home Loan Bank (“FHLB”) systems. Capital stock of the Federal Reserve and the FHLB is a required investment of the Bank based upon a predetermined formula and is carried at cost.
Loans. Loans are generally stated at unpaid principal balances, less the ACL, any net deferred loan origination fees, and unamortized premiums or discounts on purchased loans.
Interest on loans is accrued based upon the principal amount outstanding. The accrual of interest on loans is discontinued when, in management’s judgment, the collectability of interest or principal in the normal course of business is doubtful. The Company complies with regulatory guidance which indicates that loans should be placed in nonaccrual status when 90 days past due, unless the loan is both well-secured and in the process of collection. A loan that is “in the process of collection” may be subject to legal action or, in appropriate circumstances, through other collection efforts reasonably expected to result in repayment or restoration to current status in the near future. A loan is considered delinquent when a payment has not been made by the contractual due date. Interest income previously accrued but not collected at the date a loan is placed on nonaccrual status is reversed against interest income. Cash receipts on a nonaccrual loan are applied to principal and interest in accordance with its contractual terms unless full payment of principal is not expected, in which case cash receipts, whether designated as principal or interest, are applied as a reduction of the carrying value of the loan. A nonaccrual loan is generally returned to accrual status when principal and interest payments are current, full collectability of principal and interest is reasonably assured, and a consistent record of performance has been demonstrated.
The ACL is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans, and is established through a provision for credit losses (“PCL”) charged to current earnings. The ACL is increased by the provision for credit losses on loans charged to expense and reduced by loans charged off, net of recoveries. Loans are charged off in the period deemed uncollectible, based on management’s analysis of expected cash flows (for non-collateral dependent loans) or collateral value (for collateral-dependent loans). Subsequent recoveries of loans previously charged off, if any, are credited to the allowance when received.
Management estimates the ACL using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Adjustments may be made to historical loss information for differences identified in current loan-specific risk characteristics, such as differences in underwriting standards or terms; lending review systems; experience, ability, or depth of lending management and staff; portfolio growth and mix; delinquency levels and trends; as well as for changes in environmental conditions, such as changes in economic activity or employment, agricultural economic conditions, property values, or other relevant factors. The Company generally incorporates a reasonable and supportable forecast period of four quarters, and a four-quarter, straight-line reversion period to return to long-term historical averages.
The ACL is measured on a collective (pool) basis when similar risk characteristics exist. For loans that do not share general risk characteristics with the collectively evaluated pools, the Company estimates credit losses on an individual loan basis, and these loans are excluded from the collectively evaluated pools. An ACL for an individually evaluated loan is recorded when the amortized cost basis of the loan exceeds the discounted estimated cash flows using the loan’s initial effective interest rate or the fair value, less estimated costs to sell, of the collateral for certain collateral dependent loans. For the collectively evaluated pools, the Company segments the loan portfolio primarily by loan purpose and collateral into
-10-
placed on nonaccrual status. A PD/LGD estimate is applied to a projected model of the loan’s cashflow, including principal and interest payments, with consideration for prepayment speeds, principal curtailments, and recovery lag.
Loans acquired in a business combination that have experienced more-than-insignificant deterioration in credit quality since origination are considered purchased credit deteriorated (“PCD”) loans. At the acquisition date, an estimate of expected credit losses is made for groups of PCD loans with similar risk characteristics and individual PCD loans without similar risk characteristics. This initial ACL is allocated to individual PCD loans and added to the purchase price or acquisition date fair values to establish the initial amortized cost basis of the PCD loans. As the initial ACL is added to the purchase price, there is no credit loss expense recognized upon acquisition of a PCD loan. Any difference between the unpaid principal balance of PCD loans and the amortized cost basis is considered to relate to non-credit factors and results in a discount or premium. Discounts and premiums are recognized through interest income on a level-yield method over the life of the loans.
Loan fees and certain direct loan origination costs are deferred, and the net fee or cost is recognized as an adjustment to interest income using the interest method over the contractual life of the loans.
Off-Balance Sheet Credit Exposures. Off-balance sheet credit instruments include commitments to make loans, and commercial letters of credit, issued to meet customer financing needs. The Company’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded. The ACL on off-balance sheet credit exposures is estimated by loan pool on a quarterly basis under the current CECL model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur and is included in other liabilities on the Company’s consolidated balance sheets. The Company records an ACL on off-balance sheet credit exposures, unless the commitments to extend credit are unconditionally cancelable.
Foreclosed Real Estate. Real estate acquired by foreclosure or by deed in lieu of foreclosure is initially recorded at fair value less estimated selling costs, establishing a new cost basis. Any costs for development and improvement of the property that are warranted are capitalized.
Valuations are periodically performed by management, and an allowance for losses is established by a charge to operations if the carrying value of a property exceeds its estimated fair value, less estimated selling costs.
Loans to facilitate the sale of real estate acquired in foreclosure are discounted if made at less than market rates. Discounts are amortized over the fixed interest period of each loan using the interest method.
Premises and Equipment. Premises and equipment are stated at cost less accumulated depreciation and include expenditures for major betterments and renewals. Maintenance, repairs, and minor renewals are expensed as incurred. When property is retired or sold, the retired asset and related accumulated depreciation are removed from the accounts and the resulting gain or loss taken into income. The Company reviews property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If such assets are considered to be impaired, the impairment loss recognized is measured by the amount by which the carrying amount exceeds the fair value of the assets.
Depreciation is computed by use of straight-line and accelerated methods over the estimated useful lives of the assets. Estimated lives are generally
Bank Owned Life Insurance. Bank owned life insurance policies are reflected in the condensed consolidated balance sheets at the estimated cash surrender value. Changes in the cash surrender value of these policies, as well as a portion of the insurance proceeds received, are recorded in noninterest income in the condensed consolidated statements of income.
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Goodwill. The Company’s goodwill is evaluated annually for impairment or more frequently if impairment indicators are present. A qualitative assessment is performed to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value is less than the carrying amount, including goodwill. If, based on the evaluation, it is determined to be more likely than not that the fair value is less than the carrying value, then goodwill is tested further for impairment. If the implied fair value of goodwill is lower than its carrying amount, a goodwill impairment is indicated and goodwill is written down to its implied fair value. Subsequent increases in goodwill value are not recognized in the financial statements. As of June 30, 2023, there was
Intangible Assets. The Company’s intangible assets at September 30, 2023 included gross core deposit intangibles of $
Income Taxes. The Company accounts for income taxes in accordance with income tax accounting guidance (ASC 740, Income Taxes). The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur.
Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.
The Company recognizes interest and penalties, if any, on income taxes as a component of income tax expense.
The Company files consolidated income tax returns with its subsidiaries, the Bank and SB Real Estate Investments, LLC, with a tax year ended June 30. Southern Bank Real Estate Investments, LLC files a separate REIT return for federal tax purposes, and also files state income tax returns with a tax year ended December 31.
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Non-Employee Directors’ Retirement. The Bank entered into directors’ retirement agreements beginning in April 1994 for non-employee directors and continued to do so for new non-employee directors joining the Bank’s board through December 2014. These directors’ retirement agreements provide that each participating non-employee director (participant) shall receive, upon termination of service on the Board on or after age 60, other than termination for cause, a benefit in equal annual installments over a five year period. The benefit will be based upon the product of the participant’s vesting percentage and the total Board fees paid to the participant during the calendar year preceding termination of service on the Board. The vesting percentage shall be determined based upon the participant’s years of service on the Board.
In the event that the participant dies before collecting any or all of the benefits, the Bank shall pay the participant’s beneficiary. Benefits shall not be payable to anyone other than the beneficiary, and shall terminate on the death of the beneficiary.
Stock Options. Compensation cost is measured based on the grant-date fair value of the equity instruments issued, and recognized over the vesting period during which an employee provides service in exchange for the award.
Earnings Per Share. Basic earnings per share available to common stockholders is computed using the weighted-average number of common shares outstanding. Diluted earnings per share available to common stockholders includes the effect of all weighted-average dilutive potential common shares (stock options and restricted stock grants) outstanding during each period.
Comprehensive Income. Comprehensive income consists of net income and other comprehensive loss, net of applicable income taxes. Other comprehensive income includes unrealized depreciation on available-for-sale securities, unrealized depreciation on available-for-sale securities for which a portion of an other-than-temporary impairment has been recognized in income, and changes in the funded status of defined benefit pension plans.
Transfers Between Fair Value Hierarchy Levels. Transfers in and out of Level 1 (quoted market prices), Level 2 (other significant observable inputs) and Level 3 (significant unobservable inputs) are recognized on the period ending date.
New Accounting Pronouncements:
In January 2021, the FASB has published ASU 2021-01, “Reference Rate Reform. (Topic 848)”. ASU 2021-01 clarified that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amended the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. An entity may elect to apply the amendments in this update on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or on a prospective basis to new modifications from any date within an interim period that includes or is subsequent to the date of the issuance of a final update, up to the date that financial statements are available to be issued. If an entity elects to apply any of the amendments in this update for an eligible hedging relationship, any adjustments as a result of those elections must be reflected as of the date the entity applies the election. Originally, the amendments in this update did not apply to contract modifications made after December 31, 2022, new hedging relationships entered
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into after December 31, 2022, and existing hedging relationships evaluated for effectiveness in periods after December 31, 2022 except for hedging relationships existing as of December 31, 2022, that apply certain optional expedients in which the accounting effects are recorded through the end of the hedging relationship (including periods after December 31, 2022). With the issuance of ASU 2022-06 Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, the sunset date for adoption of ASU 2021-01 was extended from December 31, 2022 to December 31, 2024. The Company is evaluating the impact of this ASU but does not expect it to have a material impact on the Company’s consolidated financial statements.
In March 2023, the FASB issued ASU 2023-02, “Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method.” This ASU permits reporting entities to elect to account for tax equity investments, regardless of the tax credit program for which the income tax credits are received, using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the income tax credits and other income tax benefits received and recognizes the net amortization and income tax credits and other income tax benefits in the income statement as a component of income tax expense. A reporting entity makes an accounting policy election to apply the proportional amortization method on a tax-credit-program-by-tax-credit-program basis rather than electing to apply the proportional amortization method at the reporting entity level or to individual investments. This ASU also requires specific disclosures of investments that generate income tax credits and other income tax benefits from a tax credit program for which the entity has elected to apply the proportional amortization method. The ASU is effective for fiscal years beginning after December 15, 2023. The Company does not expect adoption of ASU 2023-02 to have a material impact on its consolidated financial statements.
On July 1, 2023, the Company adopted ASU No. 2022-02, “Financial Instruments – Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures.” ASU 2022-02 eliminates the accounting guidance for TDRs in ASC 310-40, “Receivables – Troubled Debt Restructurings by Creditors” for entities that have adopted the CECL model introduced by ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2022-02 also requires that public business entities disclose current-period gross charge offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, “Financial Instruments – Credit Losses – Measured at Amortized Cost.” The adoption of this update did not have a material impact on the Company’s consolidated financial statements.
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Note 3: Available for Sale Securities
The amortized cost, gross unrealized gains, gross unrealized losses, ACL, and approximate fair value of securities available for sale consisted of the following:
September 30, 2023 | |||||||||||||||
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| Gross |
| Gross |
| Allowance | Estimated | ||||||||
| Amortized |
| Unrealized |
| Unrealized |
| for |
| Fair | ||||||
(dollars in thousands) |
| Cost |
| Gains |
| Losses |
| Credit Losses |
| Value | |||||
Debt and equity securities: | |||||||||||||||
Obligations of states and political subdivisions | $ | | $ | | $ | ( | $ | | $ | | |||||
Corporate obligations | | | ( | | | ||||||||||
Asset backed securities | | | ( | | | ||||||||||
Other securities |
| |
| |
| ( |
| |
| | |||||
Total debt and equity securities | | | ( | | | ||||||||||
Mortgage-backed securities (MBS) and collateralized mortgage obligations (CMOs): | |||||||||||||||
Residential MBS issued by governmental sponsored enterprises (GSEs) | | | ( | | | ||||||||||
Commercial MBS issued by GSEs | | — | ( | | | ||||||||||
CMOs issued by GSEs | | — | ( | | | ||||||||||
Total MBS and CMOs |
| |
| |
| ( |
| | | ||||||
Total AFS securities | $ | | $ | | $ | ( | $ | | $ | |